Case study Terri Spiro, an experienced budget analyst at Martin Manufacturing Company, has been charged with assessing the firm's financial performance during 2006 and its financial position at year-end 2006. To complete this assignment, she gathered the firm's 2006 financial statements (below and on the facing page). In addition, Terri obtained the firm's ratio values for 2004 and 2005, along with the 2006 industry average ratios (also applicable to 2004 and 2005). TO DO Q1. Calculate the firm's 2006 financial ratios, and then fill in the preceding table. (Assume a 365-day year.) (13 marks) (1 mark each ratio listed above) Q2. Analyze the firm's current financial position from both a cross- sectional and a time-series viewpoint. Break your analysis into evaluations of the firm's liquidity, activity, debt, profitability, and market. (10 marks) (2 marks each categories ) Q3. Summarize the firm's overall financial position on the basis of your findings in part b ( 4 marks ) Q4. What ethical issues could confront a financial manger? ( 3 marks ) 55,075,000 1,204.000 51,371,000 Martin Manufacturing Company Income Statement for the Year Ended December 31, 2006 Sales Les Cost of goods sold Gross profit Lew: Operating expenses Selling expense $650,000 General and administrative expenses 416,000 Depreciation expense 152.000 Total operating expense Operating profits Les Interest expense Net profits before taxes Lew Taxes (rate 40%) Net profits after taxes Le Preferred stock dividende Earning available for common stockholders Earnings per share (EPS 1,218,000 $ 151,000 93.000 $ 60,000 24,000 $ 36,000 3,000 $ 33,000 50.33 Martin Madaming mga Acte December 11 2006 Cash $ 25,000 556 5.1.1 2,091,819 $ 24,100 TO 761445 S1.51441 51.491 MR002 $1, S12 Gm Le Accumuland depercito Netfit Totalt $1,591,319 53.125,000 and Seneliwy Carrelli Acable $ 210,000 Note yale 311,000 Accruali 95000 Tail ullam $ 16.000 Langt de SI 1620 Totallici $11,20 Stockholders Preferred 2.503, 51.300.000 Common stock (100,000 $4 400,000 Paid in capitalismo para $91,750 Rete | 10,000 Total holder ty 53.42 Total llits and didn't 51,125,000 $4,500 170,000 100002 $ $1,400 500.000 $1.071.402 550.000 400,000 9150 200.000 5,152 The 100.000 2006 Industry average 2006 Martin Manufacturing Company Historical and Industry Average Ratios Actual Actual Actual Ratio 2004 2005 2006 Current ratio 1.7 1.8 Quick ratio 1.0 0.9 Inventory turnover (times) 5.2 5.0 Average collection period 50.7 days 55.8 days Total asset turnover (times) 1.5 1.5 Debt ratio 45.8% 54.3% Times interest carned ratio 2.2 Gross profit margin 27.5% 28.0% Net profit margin 1.1% 1.0% Return on total assets (ROA) 1.7% 1.5% Return on common cquity (ROE) 3.1% 3.3% Price/carnings (P/E) ratio 33.5 38.7 Market/book (M/B) ratio 1.0 1.1 1.5 1.2 10.2 46 days 2.0 24.5% 2.5 26.0% 1.2% 2.4% 3.2% 1.9 43.4 1.2 Martin Manufacturing Company Income Statement for the Year Ended December 31, 2006 $5,075,000 3,704,000 $1,371,000 $650,000 416,000 152,000 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders 1,218,000 $ 153,000 93,000 $ 60,000 24,000 $ 36,000 3,000 $ 33,000 Earnings per share (EPS) $0.33 Martin Manufacturing Company Balance Sheets December 31 Assets 2006 2005 Current assets Cash $ 25,000 $ 24,100 Accounts receivable 805,556 763,900 Inventories 700,625 763,445 Total current assets $1,531,181 $1,551,445 Gross fixed assets (at cost) $2,093,819 $1,691,707 Less: Accumulated depreciation 500,000 348,000 Net fixed assets 51,593,819 $1,343,707 Total assets $3.125.000 $2,895,152 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 230,000 $ 400,500 Notes payable 311,000 370,000 Accruals 75,000 100,902 Total current liabilities $ 616,000 S 871,402 Long-term debt $1,165,250 $ 700,000 Total liabilities $1,781,250 $1,571,402 Stockholders' equity Preferred stock (2,500 shares, 1.20 dividend) $50,000 $ 50,000 Common stock (100,000 shares at S4 par) 400,000 400,000 Paid-in capital in excess of par value 593,750 593,750 Retained earnings 300,000 280,000 Total stockholders' equity $1,343,750 51,323,750 Total liabilities and stockholders' equity $3,125,000 $2,895,152 The firm's 100,000 cutstanding shares of common stock cloned 2006 at a price of $11.38 per share Martin Manufacturing Company Historical and Industry Average Ratios Actual Actual Actual 2004 2005 2006 Ratio Industry avcrage 2006 1.7 1.0 Current ratio Quick ratio Inventory turnover (times) Average collection period Total asset turnover (times) Debt ratio Times interest carned ratio Gross profit margin Net profit margin Return on total assets (ROA) Return on common cquity (ROE) Price/carnings (P/E) ratio Market/book (M/B) ratio 1.8 0.9 5.0 55.8 days 1.5 54.3% 1.9 28.0% 1.0% 1.5% 3.3% 38.7 1.1 1.5 1.2 10.2 46 days 2.0 24.5% 2.5 5.2 50.7 days 1.5 45.8% 2.2 27.5% 1.1% 1.7% 3.1% 33.5 1.0 26.0% 1.2% 2.4% 3.2% 43.4 1.2